Judge Refuses to Drop Charges in Stock Option Backdating Case

Published: August 10, 2006

A federal magistrate declined Wednesday to dismiss a criminal case against the first two executives charged in connection with the backdating of stock options, ruling that there were enough accusations for the case to continue.

Gregory L. Reyes, former chief executive of Brocade Communications Systems, and Stephanie Jensen, former vice president of human resources, were charged July 20 with securities fraud. The Justice Department said the backdating of stock options was, in part, cause for the company to restate financial results for fiscal years 1999 through 2004, cutting 20 cents a share off reported earnings.

Brocade, a maker of data storage devices, is based in San Jose, Calif.

Lawyers for Mr. Reyes and Ms. Jensen said Magistrate Judge Edward M. Chen of Federal District Court in San Francisco should dismiss the case because any backdating had been intended to attract employees, not to skew financial results. ''Nowhere in this affidavit does it allege the defendants intended that consequence,'' said Mr. Reyes's lawyer, Richard Marmaro.

Judge Chen replied, ''Why isn't that a fair inference?'' He also suggested that ''employees could be recruited in other ways.''

Ms. Jensen's lawyer, John Keker, said that half the companies in Silicon Valley could be prosecuted for such conduct and that his client had not known that any wrongdoing had taken place.

''She knows nothing from nothing about the accounting function,'' Mr. Keker said. ''What she did, she thought, was completely proper.''

The two defendants were ordered to appear on Aug. 30 for another hearing to determine whether there was enough evidence for a trial.

Stock options allow employees to buy shares of their company's stock in the future at a set price. They carry the potential for a big windfall if share prices rise. Backdating occurs when options are retroactively issued to coincide with low points in a company's share price.

The government says Mr. Reyes and Ms. Jensen authorized options grants to employees at prices that were below the price of Brocade's stock on the day they were issued, giving the recipients an immediate paper profit.

The government says Mr. Reyes and Ms. Jensen regularly backdated board meeting minutes so that it appeared that the stock options committee had granted options when Brocade's share price was relatively low. Prosecutors say no meetings occurred on those dates.